How to create a cash flow forecast (and why your business needs one)

A cash flow forecast is your business’s financial crystal ball, a smart estimate of the money you expect to come in (such as from sales or customer payments) and go out (think supplier costs, rent, tax and other bills). 

While it won’t predict the future perfectly, it gives you a vital idea of what’s ahead. Will you have enough cash to cover your costs? Or is a squeeze coming?

Forecasts help you plan, make confident decisions and avoid nasty surprises – especially when times get tight. 

Luckily, you don’t need to be a maths whizz to build one – this guide will walk you through putting together a cash flow forecast. Alternatively, you can use small business accounting software to create and keep a cash flow forecast updated.

Why is a cash flow forecast important?

A cash flow forecast is a prediction of the money you expect to come into and go out of your business over a set period of time. It helps you to predict whether you’ll have enough cash to cover your expenses and make informed financial decisions.

Why is a cash flow forecast important?

A cash flow forecast is a vital tool for managing your business finances effectively, because it can help you:

• Estimate when you’ll become profitable: forecasting your cash position over 12 months can help you identify when your business is likely to break even and start generating profit, making it a useful tool for startups and new businesses.
• Support business planning and growth: even if your projections are based on estimates, they provide a useful foundation for setting goals and planning activities like marketing or the allocation of resources.
• Prepare for seasonal changes: if you know sales will spike or dip in certain months, you can adjust your spending accordingly, investing more when revenue is high and conserving cash during slower periods.
• Align spending with your business values: reviewing your forecast helps ensure you’re allocating funds to areas that support your long-term goals, such as staff development or customer experience.
• Enable realistic financial decisions: understanding your regular costs allows you to make more informed decisions.
• Maintain financial control: a forecast gives you visibility into your cash position, helping you to identify areas where you can reduce costs or increase investment, and ultimately avoid financial shortfalls.

Who is my cash flow forecast for?

Your cash flow forecast can serve different purposes depending on the audience. You might be creating it for yourself, your bank or even potential investors and shareholders. 

If the forecast is for your own internal use, it’s wise to take a cautious approach. Use conservative estimates to build in a buffer for unexpected challenges and ensure you’re prepared for worst-case scenarios.

If you’re sharing it with a bank, lender or investor, the tone may shift slightly to be more optimistic, presenting your business potential in a positive light (while still ensuring your figures are realistic!)

But no matter who your forecast is for, it needs to be accurate. Overly pessimistic or overly optimistic projections can undermine the credibility of your cash flow forecast. The key is to tailor your approach to the audience while ensuring your assumptions remain reasonable and well-justified.

Creating a cash flow forecast: Step-by-step

A cash flow forecast typically includes: 

• Your expected income (such as from sales and funding)
• Your outgoing costs (such as wages, operating expenses, and other business overheads)

To get started, all you need is a simple spreadsheet tool like Microsoft Excel or Google Sheets.

Step 1: Set up your spreadsheet

Use a platform such as Excel or Google Sheets to create a simple spreadsheet. Start by choosing your forecast period – weekly, monthly or annually. 

Generally, a 12-24-month range is usually realistic without becoming too speculative.

Create a column for each time period and rows for income, expenses and a final row for your net cash flow (income minus expenses). 

Use colour or formatting to make totals easy to spot.

Step 2: List your income

Add up all expected sources of income. This might include:

• Sales revenue
• Savings or emergency funds
• Grants or loans
• Investments
• Dividends or interest

The total gives you your projected income for each time period.

Step 3: List your expenses

Now add all anticipated outgoings, such as:

• Wages and labour costs
• Rent and utilities
• Equipment and supplies
• Training costs
• Debts and repayments
• Value-added tax (VAT), if applicable

This total shows your projected business costs.

Step 4: Calculate your net income

Subtract your total expenses from your total income for each period.

• If the result is positive, you’re cash flow positive
• If it’s negative, you’ll need to plan ahead to cover the shortfall
  

Tracking this over time gives you a clear picture of your business’s financial health. Plus, having this data on hand makes tax time far easier – you’ll already know the key figures and categories needed for your return.

Final thoughts

Creating a cash flow forecast might not be the most glamorous part of running a business, but it’s one of the smartest. With a clear view of what’s coming in and going out, you’ll be better prepared, more confident and ready to make decisions that move your business forward.